The UK Spending Review's Choices

Forbes

a day ago

UK Spending Review 2025
By Dr Linda Yueh, London Business School
Former French Prime Minister Pierre Mendès-France once said, 'To govern is to choose.' The government in its UK Spending Review has made choices as to how it will spend and invest in hopes of raising economic growth. As evident in Mendès-France's observation, there are trade-offs in making those choices. The additional challenge with setting out a three-year spending plan and a four-year investment plan is that the global economic environment is highly uncertain with the return of the Trump administration that has quickly announced, then paused, a wide swathe of tariffs and other policies.
Given the challenging global economy, strengthening domestic growth drivers is even more important. The focus on investment in this Spending Review makes that apparent as the UK's growth has lagged behind other major economies due in part to its lower rates of business investment. So, the Chancellor's additional fiscal rule that allows the government to borrow to invest means that investment will grow to about £113 billion. Unlike the day-to-day spending, government investment is less impacted by any downgrades to economic growth since it does not need to be balanced by taxes which fall when the economy slows. That greater certainty around investment is not just helpful, but necessary since firms need to be assured before they will invest.
The revamping of the Treasury's 'green book', which assesses where investments should go around the country, will also place the investment in parts of the UK that could boost their ability to catch up to London and the southeast. Wales, Northern Ireland and parts of the north of England will receive investments in technology, defence, and other areas. This is 'low hanging' fruit in the sense that bringing up the level of productivity everywhere to the highest level found within a country can raise growth.
There are other challenges of course, particularly around planning and energy costs. But, the focus on investment is one strand of the Spending Review that has shown a choice by the government that has the potential to generate returns to growth.
The allocation of day-to-day spending is also aligned to growth, but those choices are driven by other factors. Health and defence received more funding than other departments. Given the pressures on the NHS since COVID-19, it was not surprising that more funding was needed. Improving health services could also help reduce the economic inactivity rate, which has stubbornly not returned to pre-COVID levels unlike other major economies. Increasing the employment rate would be positive for growth.
Due to the wars that have erupted over the past few years, the government has pledged to increase defence spending to 2.6 percent of GDP by 2027, which would make the UK the second largest spender on security after only the United States. Funding this spending by cutting international aid was a choice that has been under criticism. Although the driver was not growth, defence spending can produce technologies that raise productivity and therefore boost GDP. A well-known example is GPS. It was a Cold War era project of the U.S. Department of Defense that has since powered SatNav and self-driving cars.
Education, Net Zero and Energy as well as Science and Technology have also received better allocations. Investing in renewables and research as well as people are aligned to the government's long-term growth aims. But, these choices mean less public spending for other government departments, which could impact the quality of public services in the Justice Department, for instance.
The government has emphasised that it will invest in the use of technology, including £2 billion for AI, to make the delivery of public services more efficient. As many organisations know, the potential to do more with less is possible, but transformation programmes are challenging and takes time. For example, the Home Office set out a decade or so ago to digitalise the passport process, which is now much more efficient. Doing so is also positive for economic growth since productivity is defined as output per worker or output per hour. It may be challenging to see the fruits of this for some time, but it is another choice that should support growth in the longer term.
And that's the challenge for the Spending Review. The choices to support growth are likely to be judged some time down the line, while the choices around day-to-day spending will have a more immediate impact. To govern is to choose. But, those choices are not judged on the same time horizon. To complicate matters, during times of high uncertainty, the implementation of policy can be thrown off course. This Spending Review has certainly highlighted the challenges of choosing under uncertainty.
Linda Yueh is Adjunct Professor of Economics at the London Business School; Fellow in Economics at St Edmund Hall, Oxford University; and the author of The Great Crashes and The Great Economists.